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Here's Why We're Headed for a Stock Market Crash
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Here's Why We're Headed for a Stock Market Crash

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Here's Why We're Headed for a Stock Market Crash

Nobody knows precisely how the coronavirus pandemic will impact the U.S. economy -- neither over the next few months nor over the longer term. What we do know is that the number of daily new COVID-19 diagnoses in the country continues to rise, and is now close to twice what it was at its first U.S. peak in late April.

In response, some states are reinstating their lockdowns while others are halfheartedly asking people to wear masks and social distance in hopes of containing the virus.

It's every state for itself -- and that creates a whole lot of uncertainty for businesses. National restaurant chains, for example, face varying rules in each market, which can make it more difficult to operate. Companies in the travel, entertainment, and retail sectors, among many others, face similar problems.

Yet despite the near-endless torrent of bad news, the stock market has been resilient -- even downright defiant. At some point, that's likely to change. But a market crash -- while perhaps inevitable -- won't be the disaster you might think.

A stock market crash appears likely. Image source: Getty Images.

Bear markets happen

The stock market crashed hard in February and March, but it has largely recovered due to optimism that the economy will bounce back quickly from the pandemic. This upbeat outlook has persisted among traders despite the fact that the U.S. coronavirus outbreak is worse than ever, and some states have slowed their reopening plans or begun to roll them back.

Widespread business closures increase the risk that the market will soon tumble again, but those may not be the key factor that sets off the next bear market. That triggering event could well be the federal government allowing enhanced unemployment benefits to expire.

Currently, thanks to the CARES Act, workers collecting unemployment are getting an extra $600 per week on top of the usual state benefits they would be entitled to. That figure was chosen by Congress with the goal of keeping the average person's income roughly the same as it was when they were working, but for many whose employers were paying them low wages, it has meant they're collecting more in unemployment than they previously made.

That added benefit is scheduled to disappear at the end of July -- and Senate Republicans have shown little willingness to extend it. At that point, tens of millions of people will experience a sharp income cut, and many will be left without enough cash to pay their bills. That could have a ripple effect across the retail landscape and lead to more people (and businesses) failing to pay their rent. It will also be a blow to the already-reeling restaurant industry, and indeed, pretty much any business that relies on consumer dollars.

While unemployment numbers have improved, more than 10% of Americans are still officially unemployed -- a worse jobless rate than the U.S. endured in the worst month of the Great Recession -- and that number may shortly start to get worse before it gets better. By taking the $600 a week enhanced unemployment payment away, Washington may well be setting off an economic domino effect that leads to another stock market crash.

Stay calm and invest on

The recent market rebound was startlingly quick, likely due to the unique circumstances that triggered the downturn.

Historically, the stock market has taken longer to recover from such plunges. But eventually, it has always hit new heights again. If it crashes due to the economic impacts of the strengthening coronavirus pandemic, there's just no telling what will follow.

There could be another quick rebound due to optimism, the discovery of effective COVID-19 treatment options, or the success of one or more of the many coronavirus vaccine candidates already under development. It's also possible that a lack of those things will keep stock prices depressed for a longer period of time.

But, again, what we do know is that the historic pattern in the U.S. stock market is that busts are eventually followed by larger booms. That may not feel particularly comforting while a crash is underway, but it's an important thing to keep in the back of your head while you watch a sea of red numbers.

During a crash, take the opportunity to re-evaluate each company in your portfolio. If you still believe in your investment thesis, a down market is a great time to add to your positions.

Consider whether anything has changed for the company in the long term. If it hasn't and you expect a recovery and further growth, certainly hold and even buy more if you can. Just as important, do not let fear or the short-term movement of the market cause you to doubt your long-term investments.

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